Animal spirits and stock market dynamics

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Pyo, Dong-Jin
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Leigh Tesfatsion
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The Department of Economic Science was founded in 1898 to teach economic theory as a truth of industrial life, and was very much concerned with applying economics to business and industry, particularly agriculture. Between 1910 and 1967 it showed the growing influence of other social studies, such as sociology, history, and political science. Today it encompasses the majors of Agricultural Business (preparing for agricultural finance and management), Business Economics, and Economics (for advanced studies in business or economics or for careers in financing, management, insurance, etc).

The Department of Economic Science was founded in 1898 under the Division of Industrial Science (later College of Liberal Arts and Sciences); it became co-directed by the Division of Agriculture in 1919. In 1910 it became the Department of Economics and Political Science. In 1913 it became the Department of Applied Economics and Social Science; in 1924 it became the Department of Economics, History, and Sociology; in 1931 it became the Department of Economics and Sociology. In 1967 it became the Department of Economics, and in 2007 it became co-directed by the Colleges of Agriculture and Life Sciences, Liberal Arts and Sciences, and Business.

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  • Department of Economic Science (1898–1910)
  • Department of Economics and Political Science (1910-1913)
  • Department of Applied Economics and Social Science (1913–1924)
  • Department of Economics, History and Sociology (1924–1931)
  • Department of Economics and Sociology (1931–1967)

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This dissertation consists of two independent studies-which are closely related-that build agent-based computational stock market models. The main objective of these models is to investigate the impacts of animal-spirit shocks on fundamental values as well as the impacts of heuristic trading rules on stock market dynamics within a new computational framework distinct from mainstream neoclassical economic models.

The second core chapter develops an agent-based model of a dynamic investment economy to examine the role of animal-spirit shocks in the determination of firm fundamental values. The economy is populated by traders with intertemporal utility objectives who engage in consumption, labor, and asset investment activities in an attempt to increase their utility over time, and by a corporate firm with an intertemporal profit objective that engages in R\&D in an attempt to increase its profits over time. It is shown that a one-time animal-spirit shock, modeled as an abrupt purchase of additional IPO stock shares by one of the traders, can have persistent effects on the determination of firm fundamental values, measured as earnings per share, as well as on other critical system outcomes. Moreover, these effects can be amplified or contracted depending on the connectivity of this animal-spirit trader within a social network, and the extent to which traders desire to conform to the behaviors of other traders within this social network.

The third chapter develops a computational stock market model in which each trader's buying and selling decisions are endogenously determined by multiple factors: namely, firm profitability, past stock price movement, and imitation of other traders. Each trader can switch from being a buyer to a seller, and vice versa, depending on market conditions. Simulation findings demonstrate that the model can generate excess volatility, a fat-tail property, and the ARCH effect in stock returns.

The results also suggest the importance of trader memory length for determining the stability of stock prices in response to dividend shocks.

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Thu Jan 01 00:00:00 UTC 2015